Why Gold Is Rallying Strongly, Defying Surging U.S. Treasury Yields and a Stronger Dollar

Usually, the rise in US Treasury yields and the strengthening of the US dollar put downward pressure on gold prices quoted in US dollars. Nevertheless, the price of gold has been on the rise despite the surge in US Treasury yields and the robustness of the US dollar.

Since the outbreak of geopolitical conflicts in the Middle East, Gold futures have experienced a cumulative increase of about 9.4% and surpassed $2000/ounce as of October 31st. During this period, the 10-year US Treasury yield reached a high of 4.95%, while the US dollar index climbed to 106.1.

Since the escalation of geopolitical tensions in the Middle East on October 7th, the VIX index, which measures market volatility and risk aversion, has been on an upward trend.

Amid the escalation of tensions in the Middle East, gold - a traditional safe-haven investment - has seen a rise in demand and an increase in value.

Fed Chairman Jerome Powell has cautioned that the geopolitical tensions arising from this conflict carry considerable risks for the worldwide economy.

"It's the geopolitical risk premium that has come in for gold," said Nicky Shiels, metals strategist at MKS Pamp, a Swiss precious metals refiner and trader.

Despite the recent upheaval in the Middle East, there has not been a significant influx of investors into the Treasury market - which is typically viewed as a safe haven during periods of political and economic instability.

The long-dated bond market is experiencing its most significant decline to date due to the impact of the Federal Reserve's higher-for-longer interest rates. Investors are starting to come to terms with the reality of the Fed's long-standing message that interest rates will remain elevated for an extended period.

Given the current climate, gold has emerged as a popular option for "safe haven" investments, particularly as more investors move away from Treasury bonds - which are experiencing setbacks due to high interest rates that have eroded investor confidence in the bond market.

Some analysts believe that gold prices have only had a pulse-like upward trend due to sudden events and increased market risk aversion. Others think that despite the tendency of investors to sell gold for profit in the short term, there is a good chance that the upward trend will continue.

As a representative of safe-haven assets, gold possesses commodity properties, hedging properties, and financial properties determined by US Treasury real yields.

When reviewing the historic performance of gold prices from 2011 to the present day, it becomes apparent that geopolitical events frequently trigger a brief, pulse-like upsurge in gold prices as investors gravitate towards safe-haven assets amidst heightened risk aversion. Nonetheless, the price increase of gold associated with risk aversion sentiment tends to be short-lived.

Saxo Bank analyst Ole Hansen noted that some investors may sell gold to take profit in the short term but bullion's upward trend should continue."Peak rates have on three previous occasions during the past 20 years triggered a prolonged period of gold strength. Given the current situation, a repeat cannot be ruled out."

"It's all about risk hedging," said StoneX analyst Rhona O'Connell. "If something else happens in the banking sector, you can expect gold to go higher."